July 2010
Feature Story

Karen Lusky

“Have cost-saving esoteric test, need direct Medicare payment” has become a pressing message from companies and laboratories that perform expensive molecular assays on the specimens of hospital patients. They could eventually get their wish if a demonstration mandated by health care reform legislation shows that paying directly for such tests makes solid cost-benefit sense.

Stepped-up enforcement in recent years of the so-called date-of-service rule and bundling requirements has effectively ruled out direct Medicare payment for labs that perform tests within 14 days of patient discharge on specimens collected from a hospital patient. Entities that provide testing on a specimen ordered within that 14-day window have to turn to the hospital for payment as part of the DRG, a rule that has reportedly left many of them holding the bag.

Rather than repeal the date-of-service rule, as some commercial labs wished, the health care reform bill included a two-year, $100 million demonstration to study the impact of paying those labs that meet certain criteria directly for the testing. The law calls for the demo to begin by July 1, 2011. In the demo, the Centers for Medicare and Medicaid Services will evaluate the effect of direct Medicare payment on access to and quality of care, health outcomes, and Medicare spending, according to the legislation.

Alan Mertz, president of the American Clinical Laboratory Association, predicts the CMS will see that the savings the tests generate are important. As an example, he points to XDx’s genomic AlloMap blood test, which is used to monitor recipients of a cardiac transplant for rejection and to guide immunosuppressant therapy.

“Without the test, a patient has to have many more cardiac catheterizations and biopsies of the heart,” Mertz says. “The XDx test is accurate, much less invasive, and cheaper than the catheterization and biopsy.”

Genomic Health’s Oncotype DX is another test affected by the date-of-service rule. That test determines whether breast cancer patients will benefit from cytotoxic chemotherapy.

While the demonstration project is open to all laboratories, says Denise Bell, CAP director of federal legislative affairs, the CAP and a broad-based coalition of hospital and pathology organizations say it favors paying certain commercial labs that have proprietary tests.

The point of contention, Bell says, is what the CAP and the coalition see as the legislation’s overly restrictive definition of complex diagnostic lab tests that will qualify for the demonstration.

“The language says the test has to be an analysis of gene protein expression, topographic genotyping, or a cancer chemotherapy sensitivity assay... determined by the secretary as one for which there is not an alternative test having equivalent performance characteristics,” Bell says. That definition gives commercial labs a distinct advantage, she says, given that “it’s hard to know what ingredients are in the proprietary tests.” The CAP and the coalition are seeking changes to the legislation.

The demonstration is an improvement over an initially proposed health care reform bill measure championed by senator Ron Wyden (D-Ore.), Bell says. That provision would have repealed the DOS rule for only a handful of commercial labs and allocated $100 million from Medicare for direct payments to these laboratories—outside of the DRG—for qualifying molecular tests. “The catch was that this funding was effectively earmarked for commercial laboratories and specifically excluded hospital-based laboratories, medical schools, and teaching hospitals,” she says, “even if they were performing the very same tests or a less costly but equally effective alternative.” In addition, the provision excluded independent laboratories that had arrangements with hospitals to provide molecular testing.

As a result, medical centers and teaching hospitals would have had “little incentive to develop in-house capability even though [they] offer some of the most advanced molecular testing in the country,” Bell says.

Another issue in play is the $3,000 and upward price tag for some commercial companies’ proprietary tests, which the companies say they charge to recover their extensive development costs. By contrast, academic medical centers’ lab-developed molecular tests, depending on the tests’ complexity, tend to run from several hundred dollars to $1,000, says Jeffrey Kant, MD, PhD, director of the University of Pittsburgh Medical Center’s Division of Molecular Diagnostics and vice chair of the CAP’s Council on Scientific Affairs.

Dr. Kant says that based on his understanding of comments made by those close to the issue, “proprietary companies selling these tests have data showing that the demand for the test diminishes if physicians have to wait to order it,” which the date-of-service rule requires them to do.

“Is that because physicians decide they don’t need the test due to other information being available, or is it that their interest in doing testing wanes?”

“It’s like buying a car,” Dr. Kant says. “Salesmen don’t want you to leave the showroom without buying because they know that if you think about it, you may go to another dealer.” What drives many of these proprietary tests is a business plan with a significant expected return on investment, he says. “And there’s nothing wrong with that inherently, other than it may tend to promote overutilization.”